Greg Hinz On Politics

Illinois' financial woes begin to zap Chicago debt

The state of Illinois' fiscal woes are beginning to take a toll on the city of Chicago's creditworthiness.

One of the big New York ratings agencies, Moody's Investors Service Inc., late yesterday gave the city's debt a double ding. Moody's reduced to A3 from Aa3 the rating on $181 million of outstanding motor fuel tax borrowing. And it lowered the outlook from "neutral" to "negative," a sign that a further downgrade could be near.

Moody's was quite clear about the reason: deteriorating state finances, on which the city ultimately depends to pay off the debt. (The full report is at the end of this story.)

“Debt service on the motor fuel tax bonds of the city of Chicago is secured by a senor lien pledge of a portion of the city's allocation of state motor fuel tax revenues,” Moody's said in a statement. “With legislative approval, the state has the authority to reduce pledged revenues by reducing . . . motor fuel tax revenues to the city.”

The “risk of non-appropriation” of the state money to Chicago exists as the state struggles to raise cash for its own needs, Moody's added, implying that the risk that the state will keep the money rather than pass it along to Chicago actually is growing.

Moody's also cited the state's declining credit rating and reduced revenues from per-gallon state taxes on gasoline, which have dropped as the price of gas has risen.

City Hall is not yet responding. But the development is not good news and eventually should raise the city's cost of borrowing — particularly if such actions spread to a far larger pool of city general obligation debt.

Among funds used to secure that GO debt are revenues from the state's income tax — revenues that Gov. Pat Quinn recently proposed to freeze as part of his proposed 2014 budget.

"Assignment of the negative outlook (on the motor fuel debt) is in keeping with the negative outlook assigned to the state's general obligation debt," Moody's concluded.

Statements like that are going to cause a lot of heartburn at City Hall.

12:45 p.m. update:

The city is out with a statement:

Moody's actions “underscore the critical and urgent need for pension reform in Illinois,” it says. Mayor Rahm Emanuel “and his finance team have taken important steps to right the city's financial ship….However, without (pension) reform, all of the progress the city has made in order to invest in our communities and our children will end, and city services are at risk.”